4. The Efficiency Standard Flashcards
What does the efficiency standard argue for?
A careful balancing of the costs and benefits of pollution control. In this context efficiency is defined as the Pareto-efficient.
What is a Pareto-efficient situation?
Is one in which it is impossible to make one person better off without making anyone else worse off.
What is the efficient outcome?
The point where the net benefits available to society are maximised.
Is efficiency fair?
No not necessarily. A bigger pie is more efficient whether or not some people get a smaller share of that bigger pie.
What is a Pareto-improving alternative?
One where everyone ends up better off, eg farmers using water for a discount could make more onselling their water than for farming. Purchases of the water also get a discount.
What is marginal analysis?
It compares the marginal costs of pollution in each additional unit with the marginal benefits.
What does the use of marginal analysis allow?
The pinpoint of the efficient pollution level. At any other than the efficient level both the polluter and the victim can potentially be made better off through negotiation. Because the polluter may accept some form of compensation to stop polluting and the victim may be willing to give some form of payment to get the polluter to stop.
What is the dilemma with using marginal analysis to solve the problem? and what is the counter argument?
Should the victim pay? Does this encourage other polluters? The counter argument is that because efficient outcomes maximise the monetary size of the total pie, consistently pursing efficient outcomes does on balance, benefit most people over time.
Where is the efficient level of pollution on a graph?
Where Marginal benefits = marginal costs, this is where the benefit is maximised. It is not where total costs = total costs.
What does Coase Theorum suggest?
In the absence of transaction costs and free riding, private negotiation will arrive at the efficient pollution level, regardless of whether victims have the right to impose a ban, or polluter have the right to pollute.
What is a better outcome than allowing private negotiation to arrive at the efficient level?
More efficient to have a polluter pays principle as it reduces transaction costs and free riding and does not distort the incentives for entry into the market.
Discuss the ethical basis of the efficiency standard?
It does not require that losers be compensated, only that pollution reduction should occur at a level where net monetary benefits are maximised, as such to be really ‘optimal’ or ‘socially optimal’ it requires economists to make judgements about who should win and who should lose.
Even regulation made under the safety standard require a regulatory impact analysis to be performed, why is this?
As it has the ability to identify from the universe of safe options the most efficient outcomes.
What is the big challenge for economists in performing a regulatory impact analysis?
Ability to provide sufficiently reasonable estimates and assumptions for benefits and costs.
Cost-benefit analysis can also become a politicised tool via what three mechanisms?
- hard number illusion (benefit-cost study provide decision makers with a false sense of precision)
- corporates control the scientific agenda - funding conferences and research in areas that benefit their interests
- paralysis by analysis - opponents resort to legal system to exploit uncertainty in the process to delay / block implementation.
